Fed's Bull$h!t, I mean Bullard, is Thick in His Own Version of Reality

Just as I wrote after Janet Yellen's FOMC minutes from a couple weeks ago made me hysterical with their circular logic and "new normal" ideology, which is essentially impossible when every major central bank on the planet is still in "panic" mode with respect to supporting low/negative interest rates irrespective of every economic fundamental staring them in the face, Mr. Bullard come out quoted in this article as saying:

Low rates are likely over the next two or three years because the rate of return on safe assets when adjusted for inflation, has been 200 basis points lower in recent years as compared with the 2001-2007 expansion

First please help me out, now the Fed is using language like "safe assets" and comparing recent returns to the last 6 year period in history driven by market forces (albeit highly skewed, paper driven, derivative heavy, corrupted, recently deregulated debauchery of a market)... and stating that:

the U.S. is in a “high-liquidity-premium regime, in which investors are willing to pay premium prices for safe assets like government debt,”

Well duh!  The US is in a "high-liquidity-premium" game BECAUSE OF FED POLICY and the Fed's (including ECB, Japan and partly China) policies of driving and holding rates at artificially low levels, providing "ample liquidity" as they so often state, by buying all kinds of assets, hence completely distorting the "natural rate" of interest for so damn long now nobody even knows what the hell the "natural rate" is or would be if the Fed would do something as simple as start winding down their balance sheet!!!

It absolutely kills me that every few months the Fed comes up with new "buzz words" to describe what they insist are market forces at play without looking in the mirror!  Now it's the "natural rate on 'safe assets'".  WTF?  When will they get their heads out of panic mode and start to allow the market to function?

I actually thought after reading this short excerpt of Mr. Bullard's speech I should look it up in it's entirety and see if the tabloid, nearly worthless on-line rag of a "market" website actually covered what he said accurately.  Then I paused.  Do I really want to beat myself in the head with more pointless circular speak from a bunch of idiots that have completely lost track of reality?  No.  I want try and stay on this side of sanity as long as humanly possible.

FOMC Bargain With the Devil, Themselves

I just finished reading the FOMC notes released today.  I find them more humorous and frightening each time they are released.  It seems the folks who are setting monitory policy are some of the best mathematicians in the world of Economics but have the common sense of a doorknob.

This paragraph stands out:

Participants discussed reasons for the apparent fall over recent years in the neutral real rate of interest--or r*--including lower productivity growth, demographic shifts, and an excess of saving around the world. Al­though several participants indicated that there was uncertainty as to how long the low level of r* would persist, one pointed to a growing consensus that the long period of slow productivity growth and recent evidence that the neutral rate had fallen across countries suggested that r* was likely to remain low for some time. A number of participants noted that they had revised down their estimates of longer-run r* in their contributions to the Summary of Economic Projections for this meeting. Participants discussed the implications of a fall in longer-run r* for monetary policy, including the possibility that policy interest rates might be closer to the effective lower bound more frequently and for a long period, or that monetary policy was ill equipped to address structural factors such as the decline in productivity growth. A couple of participants noted that a lower estimated value for r* over the near term implied that monetary policy was providing less accommodation than previously thought. 

Followed by this:

Members continued to expect inflation to remain low in the near term, but most anticipated that, with gradual adjustments in the stance of monetary policy, it would rise gradually to the Committee's 2 percent objective over the medium term.

In fact reading this statement was like riding on a merry-go-round.  Their policies, essentially manipulating interest rates at near zero levels (along with ECB and JCB) with the thought that "cheap money" is the key to growing an economy irrespective of the multitude of other factors at play, are the most profound in the history of monitory policy.  They have held rates so low for so long they are starting to think there a new normal.  They are forcing rates down on one hand, then saying that "lower productivity growth, demographic shifts, and an excess of saving around the world" are influencing the natural rate of interest.  Help me out here.  Lets create a massive stimulative / accommodative monitory policy by doing everything possible as a Central Bank to keep interest rates low. Then after we do this for a while we will decide that the natural rate of interest has declined... And because inflation has not popped out of nowhere, we will continue doing the same thing, even though we are saying out of the other side of our mouths that there are structural, demographic and other factors affecting the natural rate of interest not recognizing those same structural, demographic and other factors are ALSO affecting the rate of inflation!!!

It's totally fricken obvious "that monetary policy was ill equipped to address structural factors such as the decline in productivity growth".  Yet they keep doing the same thing.

They say:

The Committee also decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipated doing so until normalization of the level of the federal funds rate is well under way. Members noted that this policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 

Do these folks even understand the dynamics of what their policies have done to distort the economy?  Do they understand that low investment accompanied by expanding debt by a corporate America that is just taking advantage of historically low interest rates to buy back stock is a function of their policies?  Do they not understand that holding interest rated near zero for so long has created an environment where firms that produce have no need to raise prices when technology has rapidly made producing everything cheaper, that production overcapacity in this world of negative or anemic population growth in the entire developed world means they simply can't sell more, yet their cost of production continues to drop as they borrow money for nothing and continue to consolidate the production of just about everything meaning they need fewer employees and that they can actually afford to keep people they don't really need cause they are making so much money selling stuff, without raising prices, productivity is being affected everywhere?  Do the central banks not see that if they would just run down their balance sheets as securities mature and allow the market to start pricing debt again that their may still be some chance of normalization of rates without them having so terribly distorted the market that any change becomes grossly destabilizing?  Do they understand there are an entire generation of people who have nearly a decade in the workforce who have only seen zero interest rates and would not know what to do if they were in a real interest rate environment?  Do they understand what happens when the expectations of mortgage rates are 3.5-4% for so long that everyone completely
re-balances their entire living budgets on this distortion?  Is it possible the average car price of some $35k with a 7 year payment cycle is only possible because of the total expectation that mortgage rates are stuck at this level for eternity?  Do they see that inflation will not return while the price of money is zero?  Do they not see their own actions are what is driving the "new normal r*"?

Lets look at an example in rough terms.  Energy producers are facing difficult times.  For decades they had one business model, growth in demand, thus growth in investment and output along with prices.  Now they are faced with a dilemma; shrinking demand.  Households are getting more energy efficient.  From appliances, to heating and cooling systems, to light bulbs and electronics are all getting more energy efficient.  Building codes demand more energy efficiency and breakthroughs in fossil fuel recovery has dropped prices in their cost of inputs.  They are seeing lower demand, lower costs of input and very low cost of borrowing, all deflationary.  Does the Fed expect that cheap money means people will consume more energy?  Does the Fed think that cheaper money will drive up fossil fuel costs?  (Almost contrary, cheap money allowed 1/2 a trillion dollars to flow into the sector to employ technology that gets even more out of the ground, creating a surplus, driving down prices, hello!) Does the Fed think cheaper money means people will consume more energy?  Does the fed think cheaper money means all the gains in energy efficiency in every category is going to make energy efficiency reverse? (Well, for autos, the answer is YES as idiots go out and buy massive energy consuming trucks that cost upwards of $50k cause money is flowing like water and gas is cheap again, but otherwise, NO.)  So do the energy producers lay off thousands of workers and shrink their energy production and distribution?  NO. They have to maintain their networks cause there is demand, it's just lower.  Does this mean lower productivity, YES unless they do lay off workers, invest in cheaper delivery technologies and figure out how to operate in a "new normal".  Is there investment in energy production?  Yes.  Renewables. Does this investment replace the loss in investment in legacy energy? At times, maybe, other times not, end result, "anemic" growth in investment in the entire sector as a whole.  Will cheap money and low rates change these fundamental realities?  No. But the Fed fails to see this example can be applied across the spectrum of industries now.  Efficiency, technology, consolidation, weak demand driven by fundamentals and demographics etc. the overcapacity is simple to see.  Getting us back to normal interest rate environment should be a priority cause they are creating other distortions that are, over time, going to be very difficult to break from.

Another example I use is Ketchup.  I make Ketchup.  I have made Ketchup for years.  I bred my own tomatoes for efficiency so they are perfect for mechanical harvesting, have less water etc. Now I make Ketchup more and more efficiently.  The packaging I use fluctuates in price based on energy prices, but the producers have also become more efficient and I can rely on steady prices.  The distribution I have over the years includes just about every outlet possible, though I still compete for restaurant chains etc., the bottom line is my product's growth rate depends on the long run on the population growth rate, unless I can get people to start using Ketchup to run their cars or something, there is no way I can sell more.  Now, I have to show my shareholders I am growing my profits and revenues so I buy my competitors, I shrink my selling sizes at the same price, I find creative ways sell my product for more money etc. But is cheap money going to make me invest more to make my Ketchup even cheaper?  No. I have plenty of capacity at a profitable level and growth is anemic so I may revamp every few years and buy out another competitor, if any are left without me becoming a monopoly, but for now, all cheap money allows is for me to borrow money to buy back my stock, boosting my per share earnings and pay dividends, hence stock incentives for executives o now take a vast amount of the earnings further creating disparities in income levels, and happy investors who see my per share profits increasing.  But are my earnings increasing cause I am selling more or growing my business? NO.  I could go on with this scenario and show how I now buy the mustard guys, then the mayo guys then the salad dressing guys etc till the entire economy for my products is one huge oligopoly... Oh, yea, cheap money allows this kind of consolidation on the cheap, but does it hire more people?  No, it results in consolidation, loss of jobs and stagnation in investment cause growth is dependent on demand and demand for my product depends on demographics, plain and simple...

Face it, the Fed is blind. They are going around circles.  They don't understand business, just numbers. They have no common sense, just charts and theories.  They would not know how to operate dress shop or manufacturer of anything, but could give you models that assume things will be just fine if you just follow the numbers... They have no inkling that the biggest companies by market capitalization in the US now make nothing at all, just buy servers and programmers and if they represent a product, it is made elsewhere, where it's cheaper and this is called "free trade" and companies seeing the globe as their production base and customer base just like the Econ 101 textbooks teach us.  So why are they following their current policies till now? Clueless for sure.
  

Will the Real Warren Buffett Stand Up?

I woke at 3:00 am and could not sleep so I skimmed over some articles, one about Wells Fargo's CEO and the circus produced by "lawmakers" to make it look like they were doing something about one of the largest frauds committed by a FDIC insured bank in US history, the largest bank in the world by market capitalization.

And I had this thought: Why was the largest shareholder, Warren Buffett, a virtual Demigod among his Rabid Republican Guard like shareholders and championed by the inbred, corrupt political establishment, not insisting the CEO, John Stumph, walk and those in charge of the divisions responsible for 5 YEARS of fraudulent activity be fired and criminally charged, and say all this publicly?  I will tell you why, because Buffett is nothing but a 21st Century Robber Barron with a very good PR team and, as I said, a rabid army of wealthy shareholders with big mouths, hence his Republican Guard, who will defend him as if he were deity.  I don't believe any Capitalist in history has ever been so revered.  This is the same guy who owns the largest legacy electric company in Nevada that managed to get the government in that state to decimate all laws that made solar power economical.  IN NEVADA!, one of the best states in the nation to use Solar Power.  Oh wait, but Buffett has a tremendous amount of his investments in industries that benefit from legacy power ruling as long as possible.  So this is natural behavior of an industrialist with deep pockets.  Be dammed those "citizens" in Nevada who remain slaves to fossil fuels and the wishes of industrialists who are determined to keep them there... But I digress.  You can look up the many other ways our Devine Buffett has acted exactly as he should being one of the largest pariahs of our extraordinarily dysfunctional, if not downright broken, "Capitalist" system.

Back to the point at hand here, Wells Fargo is a publicly traded bank that not only has a duty to make money for it's shareholders, but as a FDIC (Federally Insured) institution, responsible for maintaining the bank accounts ie; having a fiduciary duty, to protect the deposits of millions of CITIZENS of the United States and not act recklessly with their money. 

Anyone who has grown up here in the United States knows very well through direct experience or by watching the slow train wreck that has been orchestrated by the financial industry over the last 30+ years that all financial institutions in the US put the customer first for one reason, because you, the customer, is where they will steal as much money as possible, as many ways possible from you until you are down to a nickel, then they will take that to.  Financial institutions in the US are run by legal gangsters that not only get away with every kind of fraud their accountants and lawyers and bankers can dream up, but they are backstopped and insured by the American Public in so doing.  This is shown to be true over and over again, with huge losses and crashes and bailouts and fraud schemes dreamed up and orchestrated to the point of collapse about every 8 to 10 years. 

What Wells Fargo has done for a period of at least 5 years is reprehensible in any book.  Their actions from management down to the lowly sales / customer service employees on the front line who were under extreme pressure to "produce results" are criminal, no doubt.  It is criminal for an institution insured by the FDIC to commit fraud on it's customers accounts.  Period.  If you write a bad check or present a fraudulent bank statement in trying to get a loan, you can go to jail.  The flip side is no different.  If the any person, let alone the actual bank employees "creates" accounts without permission using the information of real people, this fraud is punishable by jail.  For the bank to have simply fired people over a 5 year period for actions that were criminal, and at the same time continued to act in a way that resulted in their employees, the people on the front line, and their supervisors, continuing this activity, those in charge at higher levels are just as guilty as those who committed the actual fraudulent acts.  They are more then an accessory, they are instigators of the crimes.

I don't know why lawmakers don't immediately call upon the Justice Department, the FBI and the SEC (knowing about this level of fraud, while painting a pristine image of your bank in your annual report is also fraud) and the Attorney General of the State of California, Wells Fargo's home state, to bring charges and prosecute this bank and those involved in these crimes... Immediately!

The squeamish, weak, corrupt legislators and leaders we have at nearly every level of our government are completely incapable of taking on large institutions when basically they all forget one thing:  If the services being provided by an institution are needed, then putting that institution out of business by prosecuting their leaders simply means other institutions will provide those services or new ones will rise up and assume the provision of services quite quickly in a dynamic capitalist system.  Look at what happened to Author Anderson back in 2002.  The fact that our government has become so corrupt and inbred they are incapable of doing anything to contain the abuse of the financial industry is an atrocity of magnanimous proportion in the US.  As I write this we, the United States, have lost nearly all credibility on the political front.  We have one of the most blatantly corrupt people to ever seek the highest office doing so with ease, a person who over two separate careers, a short 14 years, has managed to use her position to "raise" over $2 BILLION and fund a $250 million a year enterprise that produces nothing.  Irrespective of what her family does with this money, it is hard for a person of this level of corruption to turn around and have anything to say about the prime minister of Malaysia suddenly having $700 MILLION appear in his bank account or any other mass corruption / theft from public coffers that happens regularly around the world in nearly every deprived nation on the planet.

And so here we are.  No word from the largest shareholder, no surprise, we all know what Buffett really is.  No action by our government, no surprise, we know how corrupt and inbred they really are.  Nobody goes to jail, just some fines get paid, yea, the cost orchestrating another get rich scheme by the PIGS that run financial institutions in the US.  It's all good.

If I were you, I would write a letter to your legislator and senator and the Attorney General of California and the SEC and the FDIC and insist that action be taken now against this bank and prepare for a complete overthrow of it's leadership if not revoking it's banking charter and or breaking up the bank and offloading it to investors or just doing as was done with AT&T and making half a dozen smaller banks around the nation and an international division and letting the market work to do what it wishes with what's left.  Meanwhile the folks who oversaw the criminal activity should all be criminally charged.


Make them take a copy of "The Vision & Values of Wells Fargo" and read it daily until they are released.

If you have in excess of $250,000 in a Wells Fargo account, move the money to another bank so your money is insured.  I don't have money with Wells Fargo or I would just flat out close my accounts, I suggest you do the same.  Vote with your feet!

Are Americans Already Paying Dearly for Brexit?

I was reading an article today about "Shoe-Leather Costs", a somewhat esoteric paper related to money demand when I realized that of all of the formulas and assumptions related to interest rates, inflation, income and behavior related to how money is used, nothing addressed debt or more specifically, the cost of debt born by society at large.

This is starting to bug me as for some unknown reason, the more literature and articles I read about monetary policy and economic growth and inflation etc, not finding the cost of debt factored into the myriad of formulas out there trying to analyze economic realities leads me to believe the theories are broken.  Economists focus on interest rates that determine the "cost of money" in the financial sector and "interest" paid to savers but not to the larger and more impactful number, "debt costs", in their figures. In fact, contrary to one's intuition, economist and financial folks cheer when consumer debt is growing at a "healthy clip". 

Well excuse me, but at what point do these folks begin to understand, that nearly all wealth degradation and a huge amount of income stagnation over the last 40 years can be directly attributed to the ballooning of consumer and public sector debt. If the average American household now holds some $15k in credit card debt (not to mention Auto $28k, Student $50k, Mortgage $170k) with an average annual interest rate of $15% this means the average household is paying nearly $200 per month in interest on credit card debt alone.  Now, what is the average interest earned on savings? How about less then 1/2 of one percent, or if you are lucky and have enough money to sock away, 1%.

Just imagine if old values of saving money and buying a modest home while borrowing as little as possible at the lowest interest rate possible, still held.  What if the average household would have socked away $3000 in 1976 (the value of 15k 2016 dollars) and added the equivalent of $200 a month (about $50 in 1976) to this amount each month and continued to do so at an inflation adjust rate till today when they would be putting in $200 a month and the interest earned on their original $3000 kept up with inflation (yes interest rates on savings accounts were nearly 7% in 1976 while inflation was around 6%).  Where would this household be today?  I did some crude math, adjusting the interest and contributions every 5 years for inflation and interest rates and found they would have somewhere around $185,000 in the bank.  This compares to an average net worth (not including mortgages) of about $45k for Americans age 55-64. 

Mind you, I only did this fun little exercise on this lazy hot Saturday afternoon in Washington based on the $15k in credit card debt and the lost "savings" due to interest payments.  Why don't you have fun doing the math for auto loans and student debt, which is ballooned astronomically, and why?  Because the parents of the children reaching college age HAVE NO MONEY cause they paid it all out in interest their entire working lives!  (NOTE: Average overall household interest costs totals over $6500/year.)

I could go on, but all this discussion misses the title and point of my writing today.  For whatever reason (easy manipulation of the numbers over a 20 year or so period until 2014 when the ICE Benchmark Administration (IBA) took over the Administration of LIBOR?), many American lending institutions switched Mortgage loan interest from using US interest rates, ie One year treasury or more recently one year constant maturity rates or CMT as a base rate, to using London Inter-Bank Offer Rates or LIBOR plus their customary 2.25% or whatever. 

This little move means that millions of American mortgages are tied to in interest rate set in London, the capital of a nation that just voted to exit the European Union which could, though has not thus far, create volatility and instability in London rates.  Why is this important?  Well, the one year LIBOR rate now stands at 1.52% vs .85% one year ago.  Meanwhile the one year CMT or Constant Maturity Rate in the US is about .58%, the 11th District Cost of Funds rate is about .68% and the European Interbank Offer Rate is -.05% (yep that's negative).  So Americans unlucky enough to have the LIBOR rate are going to see base mortgage rates that nearly double last years rate at this time, and average 1% more then comparable US mortgage lending rates.

The change in LIBOR alone, given the historical average of 15% of outstanding mortgages being adjustable rate would result in Americans paying out about $600 million more per month or $7.2 billion per year in additional mortgage interest.  If they have credit cards and student loans also based on LIBOR this number will be significantly higher.  So you have a kind of global financial tax that the Fed can do nothing about.

So why is LIBOR so heavily used in the US today?  My guess is during the go-go days of using mortgages as the underlying "asset" for the myriad of financial "products" that were used to gamble with, the money borrowed to play was global in nature.  Hedge funds, Insurance companies, Private Equity, Financial institutions etc. from Europe, London, Hong Kong, the US and every "off shore" domicile imaginable all played with money borrowed and lent at international interest rates so why not base the underlying asset's interest rates on the same global lending rate paid by the gamblers... and so now you have it.

Central Banks Perpetual Crises Mindset

I ran across this article today: http://www.bloomberg.com/news/articles/2016-08-21/inside-the-global-hunt-for-a-better-way-to-measure-the-economy

It is interesting that over just the last 30 days or so there is a "buzz" around the financial community about the validity and usefulness of GDP in measuring output and of course this is another way for those who believe the Central Banks desperately need to "normalize" interest rates to get their point across.

Aside of the special interest's motivations, three of my potential thesis are being reflected in this trend, 1) I believe all measures of GDP need to be drastically revamped as traditional measures of collecting the data are vastly outdated and 2) employment numbers and productivity need drastic new looks as the dramatic declines in labor participation in the US are not consistent with consumer purchasing power / stats and 3) Economist need to broaden their measures of productivity in the new economy of Uber's and Air BnB's of the world and understand that productivity is no longer a measure of just "producers" productivity, but that now, all assets in the economy, need to be factored in.  People are renting their houses, cars, labor etc. in disruptive ways never before done and till now not accurately measured in data that are influencing the central banks policies.  These are all tied together.

This is the first article I have seen mentioning, albeit not convincingly or with any detail, some of the factors I believe need to be addressed.   So I thought I would share :-)

My latest theory is a little less tangible.  It has to do with what happens when Economist / Central Bankers themselves become victims of a kind of a perpetual lack of ability to understand they to can be influenced by "behavior patterns" and "psychological factors" so often measured by Economist on consumer behavior and their "behavior patterns" can lead to irrational decision making.  I believe they were so spooked by the global financial crises / credit freeze in 2008/9 they can no longer see clearly.  No matter what happens in the economy, they can find 2-3 "global" trends that continue to drive their thinking in a perpetual crises mindset. They simply no longer see clearly.  They have completely lost faith in the "free market" model.  They think more and more like the Chinese, where understanding of market fundamentals is translated by central planners to direct intervention in an attempt to "create" these fundamentals through "force" vs understanding that all economic theory comes from human behavior and that this behavior creates economies that in turn create observable market forces that become that theory one can study and write about.  There is no way to reverse this and force it to happen without allowing markets to determine a given outcome and or understanding markets will be severely disrupted if one attempts to do so.

To ignore economic fundamentals and market forces is leading us to the point where the destructiveness of Central Bank policies are parallel to the kind of problems that happen during traditional bubble psychology, where all "investors" act irrationally until the entire thing collapses.  In summary, the global mind think of Central Banks / Traditional Economic theorists is stuck in crises mode and their actions are leading the entire global financial system to a huge cliff.  It's time for them to look in the mirror and understand where they are headed before it's to late.

Just a small thought, and to think Market Psychology and Consumer Behavior are my two least favorite areas in Economics :-)